After a natural gas pipeline explosion leveled a San Bruno neighborhood in 2010 and killed eight people, the staff at California’s Public Utilities Commission (PUC) recommended that Pacific Gas & Electric pay a penalty of $2.25 billion for various transgressions that led to the blast.

In April, the commission signed off on a penalty of $1.6 billion, even as federal prosecutors continued to seek $1.13 billion in U.S. District Court for 28 counts of alleged safety violations and obstruction of justice. A federal grand jury had indicted PG&E in April 2014 at the urging of the U.S. Department of Justice (DOJ) and the California Attorney General’s office.

“Despite knowledge of these deficiencies, PG&E did not keep a record-keeping system for gas operations that would ensure that pipeline records were accessible, traceable, verifiable, accurate and complete,” the indictment (pdf) said.

Last week, U.S. District Judge Thelton Henderson reduced the ceiling on the penalty prosecutors can seek at trial by half, to $565 million. The judge found PG&E’s argument compelling that it wasn’t legally appropriate for the utility to pay for a category of fines related to “gross losses” suffered by victims of the explosion.

Prosecutors had based their calculation on the amount of money PG&E spent compensating victims of the blast that destroyed 38 homes and injured 58 people (beside the deaths).

The remaining $562 million in proposed penalties was derived by doubling the amount of money PG&E made by not properly maintaining its pipelines. Those penalties can still be reduced more once the trial begins in March.

According to the San Francisco Chronicle, Judge Henderson wrote in his decision that the trial court could not simply accept the valuations of personal loss determined by civil proceedings. Each individual’s claim in the case would have to be litigated. The result would be “massively complicating,” with the government needing “to prove that each victim’s losses were proximately caused by the charged offenses, not by the explosion.”

The faulty pipeline weld that gave way in San Bruno had not been inspected in 54 years, partially because inadequate records failed to indicate certain characteristics that would have flagged it for attention. PG&E has already been compelled to reassess the entire system and put in place a real inspection and repair system.